Three things you missed from bank earnings, including the defense of the physical commodities business

Sure, you know the obvious story lines from the latest round of bank earnings: mortgages down, fixed-income trading down, yadda yadda yadda. But here are a few things you might have missed.

1. Goldman Sachs Group Inc. and Morgan Stanley don\’t plan to give up their physical commodities businesses too easily.Regulators are considering whether to put an end to the banks\’ practice of owning oil pipelines, metals warehouses and the like, after a New York Times investigation this summer said the banks were unfairly driving up prices. J.P. Morgan Chase & Co.
took note, and within a week announced that it would sell its physical commodities business. (It\’s still in the process of doing so.)

But Goldman
and Morgan Stanley
gave no hint this week that they might follow.

\”It\’s been a good business for us for many years,\” Morgan Stanley CFO Ruth Porat said in a call with analysts Friday.

At Goldman, CFO Harvey Schwartz said the bank intended to hold its investments in physical commodities \”for years.\” And as for the related franchises, \”The extent in which we’re involved in the physical business is the extent to which our clients need us to be involved.\”

\”Now we have a long, long investment in the commodity business, and we have at this stage no intention of selling our business,\” Schwartz added, in Thursday\’s call with analysts. \”We’re very committed to our clients here. And so we’ll just work with the regulators. But ultimately, the regulators will come to their own opinion about the business.\”

2. The investment banks tried to be less risky. Mostly, anyway. That story is told through a measurement called VAR, or value-at-risk, which shows how much money a bank could lose on trading losses on any given day.

That measurement declined most dramatically for J.P. Morgan\’s investment bank, plunging to $42 million from $112 million a year ago. Morgan Stanley also took its VAR down, saying it was taking less risk in fixed-income and commodities (the unit that got hammered this quarter as investors got nervous about the Fed\’s surprise QE decision and the federal budget standoff), and Porat noted in a call with analysts that it was at the lowest level in years. The VAR for Bank of America\’s
investment bank was also down slightly compared to a year ago.

By contrast, the VAR at Goldman Sachs rose slightly over the year, though Schwartz said that was more a function of volatile markets than bank actions. He also pointed out how the bank had tamped down risk in foreign exchange trading over the summer. (For those trying to keep all the bank investigations straight, U.K. regulators just announced that they are starting to look into whether banks have manipulated those rates.)

Citigroup
doesn\’t report the VAR level for its investment bank until it files a 10-Q, which won\’t be for a couple of weeks.

3. Investment bankers could make less money this year. Goldman, Morgan Stanley and J.P. Morgan all cut a key measure of pay for investment bankers — pay as a percentage of revenue. And while the drop was most dramatic at Morgan Stanley, it was Goldman Sachs where it seemed to cause the biggest stir. Analysts asked about it in the earnings call and mentioned it in research notes, wondering how the change would affect returns. Goldman said the decision was based on current revenue levels (though revenue year-to-date is up slightly from this time a year ago) and \”better visibility on expected compensation levels.\” Oh, that\’s clear.

Then, when UBS analyst Brennan Hawken asked Schwartz if this was a sign of Goldman \”rationalizing\” parts of the investment bank, like the fixed-income trading division, \”to a new regulatory and business environment,\” Schwartz replied with an anecdote about his first day at Goldman, and how the bank\’s compensation philosophy hadn\’t changed since.

Bank of America and Citigroup don\’t disclose the comp-to-revenue ratio for their investment bankers, though both trimmed the amount they spent on pay overall.

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